Audits of financial statements and advisory – Where auditor independence ends (P)

By Dr. Bernd KellerPartner, Economist, Auditor, Tax Consultant | Rödl & Partners

Both external addressees of financial statements, like stockholders and banks, and companies themselves trust that the auditor expresses an independent and objective opinion about the audited financial statements. This requires independence, i.e. the auditor cannot have any relationship with the audited company. On the other hand, advisory or other assignments regarding the audited financial statements can raise fears that the auditor deliberately conceals or even does not recognise the errors relating to those statements. Therefore, the legislator has introduced regulations whereby the auditor can be excluded from the audit if there are doubts about his or her independence. The above regulations set more restrictive limits on public interest entities (PIE), i.e. in particular on companies which use the capital market within the meaning of § 264d HGB, while the auditor can provide a wider range of services to other, in particular medium-sized, owner-managed companies (Non-PIE).

Accounting and preparation of the annual financial statements

The following principle applies: audit and advisory services are compatible as long as the audited company makes the final decisions itself and assumes responsibility for those decisions. Therefore, it is acceptable when the auditor only gives the company suggestions on how to structure the organisation of work and processes. These can refer, for example, to the definition of internal processes and the development of charts of accounts or accounting manuals. In particular, the auditor may advise the client in connection with the audit, he can point out errors and suggest corrections. Within this framework, admissible are advice on accounting policy measures, support with setting up IT-accounting-tools or services related to the internal control system or the risk management system. Payroll accounting services are permissible, too, if only technical work is performed (e.g. preparation of payrolls, data processing etc.). In any case, the preparation of the annual financial statements or its components and the account assignment of on-going transactions by the auditor are excluded from this scope.

Internal audits

It is admissible to carry out individual internal audit engagements. By contrast, it is not allowed when the auditor has a responsible position, i.e. when he or she assumes or manages this function while performing the internal audit.

Tax advisory services

Usually, tax advisory services as such do not collide with the independence of an auditor. But in case of PIEs there are exceptions. In these companies the auditor cannot provide tax or legal advisory services going beyond pointing out structuring alternatives which have a significant impact on the annual financial statements. It is usually possible to represent all companies during external tax audits and in court and out-of-court appeal proceedings against decisions of tax authorities.

IT and other advisory services

When performing other advisory services the auditor is not allowed to make any entrepreneurial decisions concerning the annual financial statements, either. In non-PIEs, the auditor can participate in the development, set-up and implementation of financial information systems (e.g. programming or customisation of ERP software). Such advisory services are not allowed in PIEs. Regular valuation services are only admissible when the company has already presented the bases for the calculation or when the valuation has a small impact on the annual financial statements.

Summary

The auditor may continue to provide audit and advisory services to medium-sized clients who do not use the capital market. This allows clients to benefit from the auditor’s detailed knowledge about the company and from the advantage this knowledge gives that auditor over other service providers. Below we list some examples of areas in which the auditor can basically support non-PIEs (in some cases appropriate contractual arrangements may required):

rodl table - article 2rodl table - article 2 Rödl & Partner is active at 94 wholly-owned locations in 43 countries. The integrated firm for audit, legal, management and tax consulting owes its dynamic success to over three thousand entrepreneurial minded partners and colleagues. In close collaboration with our clients we develop information for well-founded economic, tax, legal and IT decisions that we implement together – both nationally and internationally.

Source: www.roedl.de/themen/

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